More Credit Alternatives

By Bizbox

Since big banks tend to be short on cash right now, we've been trying to show you new and exciting ways to get cash these days.

Today we'll look at a very typical way of securing money--credit cards--and a more untypical way--factoring companies. Each carries its own certain risks and potential rewards.

Small business' use of credit cards had been growing even before the credit crisis hit, reports Business Week, so that, today, close to half of small firms--and probably even more of those in early stages--use them to borrow money. On the flipside, credit card companies have offered small business-specific cards, to the point that one-eighth of mailed credit card offerings advertise such cards (time to note that BizBox is sponsored by American Express OPEN, its small business card).

What's the problem? You should know if you've ever neglected to pay the full balance of even a personal card one month: interest rates tend to be exorbitantly high--the article reports on one business whose rate on its balance exceeded 30%--because the issuers are essentially free to change the terms just about whenever they like. Keep your balance too high, and your small business card rapidly becomes more trouble, and money, than it's worth.

So how a credit card best be used? The structure of credit card payment is of course such that depending on when you take out on a loan on it, you could have close to a month to pay it off in full without seeing any interest charged. Maybe you have certain monthly needs--overhead? payroll?--that you tend to be able to pay off given enough time? If you're currently using some less onerous form of credit to take care of that, it may make sense to divert that to a credit card and use the other form of credit for something more ambitious.

That said, there's no denying that credit's really hard to come by right now. So it may still be a good idea to bite the bullet and genuinely take out a loan on your credit card. Just try to keep that balance small!

Meanwhile, the Washington Post considers the factoring company, a type of firm that will essentially buy a bill from you in exchange for how much you are owed according to that bill immediately--minus a cut, naturally.

If you need cash immediately, it's difficult to think of a less risky way to get it. After all: this is not a loan. You do not borrow money from a factoring company; you don't need to pay it back. Instead you engage in a one-time transaction with them: something for something. In fact, it's something in exchange for the exact amount that that something is worth. Except for that darn fee, wherein lies the rub.

That bill you're selling to the factoring company didn't materialize out of thin air. Rather, you likely sold someone a good or service in exchange for their promise to pay you back--that bill. You are owed what's on that bill; that's at the heart of your business model. When you go to a factoring company and pay that fee on that bill, you are cutting into your own profit, and upending your whole profit structure. And the fees tend to be large enough that, say, bank loan rates are lower.

Of course, bank loans are hard to come by these days. (And indeed, the article reports of one D.C.-area factoring company that most of its clients are referred by area banks.) So you may find yourself in the position of needing that bill paid faster than you had agreed upon and heading to a factoring company. Our advice: don't rule this out. But before you sell the bill, call up whoever's on the other end of that bill and ask if they couldn't manage to pay some or all of it sooner. You just may be surprised and find yourself getting exactly what you wanted in the first place.

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October 27, 2008 9:24 AM